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Is Economic Mobility In the U.S. Dead?

March 15, 2012

By Diana Furchtgott-Roth

PRINTER FRIENDLY

Is economic mobility dead? Are the rich forever rich, the poor forever poor, and are the rest of us stuck in between? This repeated obituary for economic opportunity in America is frequently found in the popular press.

These assertions are suspect for two reasons: they are not well-supported statistically, and they come from left-of-center commentators with an agenda, a predilection for more redistribution of income, chiefly by means of higher taxes on upper-income earners.

For instance, there is Timothy Noah, writing in The New Republic. He finds that "a nation that prides itself on its lack of class rigidity has, in short, become significantly more economically rigid than other developed countries."

Other like-minded commentators are New York Times columnists Paul Krugman and Jason DeParle and Washington Post columnist Fareed Zakaria.

Let me be clear: this is bunk, tendentious bunk. In part it relies on a short-term perspective that gives too much weight to the 2007-2009 recession and the subsequent sluggish job growth that has persisted. Sensible analysis calls for a long-term perspective so that the trend is not distorted by a slice of the business cycle.

The effect of the recession, any recession, can be ameliorated by policy changes. (Readers of this column know that in the past I have taken issue with the Obama administration’s economic policies.)

The necessary longer-term perspective on mobility can be gleaned from a Treasury Department analysis of income-tax returns for two 10-year periods, 1987-1996 and 1996-2005. Treasury economists Gerald Auten and Geoffrey Gee analyzed the income reported on a sample of 107,000 tax returns for 175,800 taxpayers, representing 84 million returns for 120 million taxpayers.

The tax data show that economic mobility has not changed. From the 1980s to 2005, many Americans progressed both in terms of absolute mobility-they became better-off in absolute terms-and in terms of relative mobility-they rose to another part of the income distribution.

The 2007-2009 recession and the ensuing continued period of high unemployment have slowed mobility, chiefly because of the cautious, slow pace of hiring by employers. Lack of job prospects has led to lower quit rates, and a generalized sense that opportunity is lacking. As hiring picks up, and it has begun to pick up this winter, optimism and a more dynamic labor market will reappear.

The study, published in the National Tax Journal in 2009, and largely ignored by the mainstream press, found considerable mobility between income groups during the period 1987 to 2005 for the vast majority of workers. Using a sample of individuals aged between 25 and 64, the Treasury study found that 56 percent of those in the lowest income quintile at the beginning of the period had moved to a higher quintile 10 years later. Almost 30 percent went to the second quintile, and 27 percent moved up two or more quintiles. At the end of the 10-year period, 4.5 percent had moved to the top quintile. One of the reasons for moving to another quintile was marriage.

As some move up, others move down. But the study found rising incomes overall. This is known as absolute mobility. During the period 1996 to 2005 median incomes of taxpayers rose by 24 percent after adjusting for inflation, with median incomes of those at the bottom increasing more than those at the top.

The data show that absolute mobility has increased over time. From 1987 to 1996, 59 percent of taxpayers saw real income gains. During the following decade, from 1996 to 2005, two-thirds of taxpayers saw inflation-adjusted gains in their income. Similarly, from 1987 to 1996, the median income of those in the bottom quintile rose by 68 percent, but it rose by 77 percent from 1996 to 2005.

Relative mobility, or how taxpayers compare with those in other income groups, from 1996 to 2005 was similar to mobility between 1987 and 1996. Both decades saw the same degree of mobility out of the lowest quintile, namely 62 percent. In both decades, 41 percent of those in the top quintile remained there. Fifty-seven percent of taxpayers changed quintiles in the later decade, compared with 58 percent in the earlier.

Furthermore, many of those in the top quintile do not stay there. Only 40 percent of those in the top quintile in 1996 were there in 2005. Less than a quarter of those who represented the top one percent in 1996 were among that coveted group in 2005.

More evidence that the same people are not necessarily in the top one percent over time comes from a list of the 400 individuals with the highest income in each year from 1992 to 2008 published by the Treasury Department. It shows how many times each individual has appeared on the list. The list shows substantial turnover.

Data show that 3,672 different taxpayers were in the list of the top 400 returns over the years between 1992 and 2008. Only four returns, or one percent, were found on the list in all 17 years. About 27 percent of taxpayers are represented more than once on the list, and 15 percent more than two times. On average, each year 39 percent of those in the top 400 were not on the list in any other year.

These Treasury Department findings are different from the popular perceptions about income in America. Income mobility in America between 1992 and 2008, and quite likely in any other time period, shows dramatic churn.

The two Treasury studies are significant because they are based on the same taxpayers over time, using tax-return data. In other words, they are not based on survey data where income recollections can prove faulty, or on comparisons of some individuals with different individuals.

One group that does need help with achieving greater opportunity is high school dropouts. Individuals who do not complete high school have limited opportunities.

America has a 75-percent high school graduation rate, meaning that one in four teenagers who enters high school fails to graduate. To improve upward mobility in America, this should change, and we should consider offering these students the option of vocational training in high school and perhaps an extra-curricular program similar to German apprenticeships.

Once students in Germany complete secondary education, they may enroll in an institution of higher education, or become a paid apprentice. Apprenticeships start between ages 16 and 19 and typically last three to four years. Some apprentices split time between vocational school and their on-the-job training.

The widespread story that economic mobility is dead in America is wrong. Americans can and do move substantially up and down the economic ladder. The recent recession, however, has substantially curtailed job openings, especially for young and low-skill workers, and limited economic opportunities will likely reduce economic mobility until the unemployment rate declines.

Original Source: http://www.realclearmarkets.com/articles/2012/03/15/is_economic_mobility_in_the_us_dead_99569.html

 

 
 
 

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